Thursday, September 30, 2010

As essayist/farmer Eric Andrews notes, it makes little financial sense to grow one's own sustenance now due to the all-time lows in the cost of food. We might also conclude that it makes no sense to change the oil in your own vehicle, refinish furniture (new crappy particle board furniture from China is "cheaper" than refinishing) or indeed, to do anything for yourself: it can be outsourced or performed by a global corporation "cheaper" than you can do it.

This may partially explain why Americans have generally lost the skills and curiosity needed to do anything real for themselves, such as cook/bake, effect household repairs, write their own code, or build a business or house from scratch.

As noted earlier this week, the other factor is dependence on the Central State, which enervates those who have sacrificed autonomy and political independence by depending on the State--a condition closely related to addiction.

Self-reliance receives abundant lip-service but few seem to have any interest in pursuing it in the real world. How many hours are spent in households watching TV, checking Facebook and Twitter, IMing on cellphones, playing with iPods, email, websurfing, etc., and how many are spent learning or doing anything of value in the real world?

The answer to that question defines America's level of self-reliance: poor to zero.

So if there are few if any financial incentives to self-reliance, why should we bother learning to do things for ourselves? In a soulless culture, then the answer is "obvious": there is no reason, so passive, resentfully entitled complicity with the status quo is the "solution."

But if a soul flickers even partially alive in a human being, they will desire autonomy and independence, and the joys of curiosity, learning, failure (yes, failure, for it is the Great Teacher) and mastery will arise to fill the vacant darkness at the center of the American Empire and "lifestyle."

MY INTRODUCTION: "If I set out to encapsulate my Survival+ critique in a mere 2,700 words, I could do no better than this: a closely reasoned case for opting out, small-scale, resilient solutions and radical self-reliance--the very heart of the Survival+critique.

Some readers seem to think that this is an implicit recommendation for living in mud huts and a return to a pre-technology Dark Ages. Nothing could be further from the future I envision, which is radically better, more sustainable and more humane than the present dominated by an insatiable Savior State and its Global Empire which protects and empowers a handful of cartels and fiefdoms at the expense of the world and the U.S. citizenry."

Solutions Start at Home

by Eric Andrews

In my last article I pointed out that the real problem with writing about solutions is that no one can know what you need or tell you what to do. Your situation, your needs are different than my needs and situation, so only you know what is best. That’s Liberty: you are completely in charge but completely responsible when things go good or bad. And isn’t that the way it should be?

But still, solutions are of the essence. So although I can’t tell you what you should do at your house, I can tell you what we do at mine. Hearing things—how solutions of any kind are assembled—can give us ideas for what we all can do.

In this new era, all solutions will be local. Local weather, local availability, local conditions will dictate what will and won’t work. I live in the Northeast, out on the Lake Plains east of Buffalo, NY—a land of small woodlots and small fields. It's rainy and cold both spring and fall, with sustained snows of 2-3 feet average, 6 feet at a single storm is no surprise, yet also windswept and baking for much of the summer. Things that work for me may not work for the deserts of California or the Southwest, the vastness of Canada, or the moderate Carolinas. But then again, who can say what can or can’t be done?

Apple Lawn is a small farm of 52 acres, which hasn’t been commercially worked in a generation, as the price of food has been too low all that time. I know that may seem impossible, but the price of food has never been this low in human history.

But although food is cheap and I have a job in the city, the farm still calls with rich clay soils and the endless optimism of spring.

Having worked the same quarter acre garden for decades, providing us with year’s supply of tomatoes, sweet corn, green beans, eggplants, peppers, lettuce, asparagus, and whatever strikes our fancy, last year we opened up a second quarter acre plot on soil fallow for more than a decade.

It’s been said that the end of oil will be the end of us all as tractors, fertilizer, and pesticides, will become unavailable at any reasonable price. This is misguided perception by people who didn’t further their research into how farms and gardens work. It may be true that you can’t intensively-garden 52 clay acres without 52 well-trained farm hands; however, a modest trip back in time—merely to the 1940’s—shows how it was done by my own grandfather, driving his team Molly and Dolly through the clays of slow-moving Niagara county. It's true you can’t grow corn year-on-year on the same soils, for it will degrade and wash away into a ruinous hardpan or dustbowl. However, you don’t have to--you simply use the crop rotation that’s been industry standard since the early Middle Ages. You divide your large fields by four and one of them lies fallow each year, renewing the soil. This would be seeded to hay—a weed of your choosing—and fed to the animals who would then fertilize the other three fields.

This is why small farms of the past thousand years included animals, and why before the brief era of cheap oil, pesticides and fertilizers, this diversified, small-farm plan prospered over other methods, nor would an animal-free farming necessarily be recommended. Should the price of oil rise, the clock will rewind as far as it has to, back to the point where oil input meets availability or pasture is replaced by biodiesel. This isn’t terribly hard, but it takes an uncomfortable period of time to retool. Reserving one quarter of your land to pasture nearby animals is an indispensable piece of this. No more agri-business, no more factory farms, and the smaller it becomes, the happier the cows, chickens and other stock, living in the sunlight and unplowed grass they were born to. That makes happy people.

In our county, some changes are already happening: with the price of chemical applicants rising so rapidly, farmers quickly adopted new old methods. Instead of plowing before planting, the farmers here have planted soybeans (a renewing crop) right over existing cornstalks, and under-seeded winter wheat to hay (another renewing crop), thus saving both the diesel plowing costs and the fertilizer costs. Others have gone one better and planted beans following cabbage, wheat following cabbage, or other crop combinations in series, pulling out two crops in a single year. Gains of this sort are scarcely touched upon so long as food is too cheap to grow and harvest, but the answers are out there, waiting for immediate deployment to a hungry world.

Being 10 years fallow, our field needs nothing. Why did we expand to it? No reason at all. I tell you in all honesty, you’re not going to save much growing food compared to buying staples like corn, beans, rice, and hardly anything for your vegetables—and certainly not the storage staples like carrots or winter cabbage. Your food costs really exist only in processed foods: soda, diet microwave dinners, breakfast cereals. We grow food simply because we like to see it grow. I have no words for this, but somehow it’s improper to buy foods made by faceless men 1,000 miles away and leave our backyard untouched. No responsibility. No contact. No reality. No life. No happiness.

So, we plowed it to plant the bulk crops that would have consumed the old garden: our three Seneca sisters: field corn, dry beans, and pumpkins. I know some will be saying, “that’s all well for you rich folks with a 40-year old tractor, but what about the rest of us?” It’s really a small matter: a quarter acre is actually a nuisance to break with a plow and disc, barely room to turn around; besides, I could hire it done for 30 years for the price of a tractor. I could prepare it with a collar and carriage horse, a yoke and a milk cow, or maybe two donkeys, and in fact the equipment to do so remains strategically located in flower beds around our neighborhood. --Or you could do as Thoreau and turn it over in a few evenings with a shovel and a pair of heavy shoes. It only needs to be done once, so your investment will be divided by however many decades it’s in use. Once turned or broken, you can rent a rototiller for a very small sum and finish the seedbeds in two hours once a year, and will be all it requires for every season thereafter.

So we plowed. We planted. When? Why, in the spring, of course! I say that not to be flippant, but in Western NY any time it’s not frosting and dry enough to work is the right time, right up to high summer. We planted this year in mid-May, but have often planted the same garden on the 4th of July with little difference. That’s just where we live with the world’s largest freshwater lakes cooling us. That’s how simple growing is.

Here’s the secret garden books don’t tell you: plants want to grow. A lot. They’re saving their lives, just as you would, dropped from the sky to some small piece of ground somewhere in the world. They do all the work, stretching and growing in the sun. What do we do in comparison? Am I somehow instrumental in pulling them out of the ground? No. Do I bottle-feed or tuck them in at night? Not a bit. All I do is tip conditions in their favor and insure they remain that way, so that one plant grows and not another. So beans and not, say, the amaranth that grows so vigorously here. Not that the amaranth is my enemy—I eat that too—but I happen to be looking for beans in this particular patch. The amaranth is welcome to grow anywhere else it finds.

Cultivated Amaranth – a South American Staple

To insure the beans keep their unfair advantage, I weed them a couple times ahead of their faster-growing competition. Weeding? Aaaaaiii! This is the part where people lose interest and call shenanigans on all this hard work. But I don't work, I cheat. And why shouldn't I? Over 100 years ago, a device was invented called the "Planet Jr. wheel hoe" which any thinking man must consider to be the greatest invention of the century. I encourage any one who row-gardens to run, not walk, to get one. They lasted so long and required so little that the original Planet Jr. company went out of business in 1968. It took over 40 years, but finally enough have broken or rusted away that they are being re-cast again, on ebay.com or at Planet Jr.(no affiliation or experience with vendor).

If that’s too expensive, buy one from an antique dealer or out of someone’s front yard. They should go cheap: other than kitschy decoration, nobody remembers what they’re for anyway.

Planet Jr sweep hoe

To weed with one of these marvels, simply walk up and down between the rows every five days, like pushing the sweep blades like a grocery broom. You see, weeds germinate but remain tiny and fragile for a week before becoming visible. If you disturb them even slightly in that time, they will wither before you ever see the smallest sprout. Voila: no weeds and rows as clean as wall-to-wall carpet. All you need to do is walk the rows once a week. Or if you’re lazy, do a few rows until you’re tired of it, and the next day walk a few more, and so on back to the beginning.

It has no motor, requires no upkeep, and can stay outdoors indefinitely. When the handles finally rot off in 20 years, they can be replaced. The iron parts could even be cast in your backyard with the right setup: backyardmetalcasting.com. For the purpose, this investment will beat any tractor made. For the secret is in the knowledge not the tools. Five days is that secret.

Contrary to national (or NY City) belief, New York is an large and predominantly rural state as well as an agricultural powerhouse. Here in the Lake Plains we have more in common with Ohio or Iowa than with small and moderate New England—90º in summer is given, and although the lows are limited to 0º by the Great Ontario (809 feet deep!) our total snowfall averages 8 feet. By the time it’s 90º in the summer, the cool morning is too short to weed in, so I don’t.

Sure, I could have a show garden, perfect and weed free, but only by climbing up the law of diminishing returns. For here’s the second secret to gardening: plants like to grow together. In nature, you never find a single plant growing alone in bare soil—bare soil is an anathema to Nature. Plants forever grow together—either their own species or some other—and in my experience they languish when laid out in isolation.

You notice from the picture that the weeds have long outgrown my bean rows. Yes, those are rows. Yet the diminished yield from permitting weeds is negligible compared to the benefits these volunteers provide: microshelter from stripping winds, deep fertility of soil, moderate shade conserving water in drought, and habitat for a wide variety of insects and other creatures who insure that no one species of bean-eating creature can get out of control. This saves me work all around, and is well-known, both to the original natives and in challenging locations like the Amazon, where weeds must grow with the fields or the settler’s garden would be wiped out. (for more information see Weeds: Guardians of the Soil by Joseph A. Cocannouer.)

But today it’s the harvest. Frost is now 30-60 days away and nothing flowering will mature in the time left. To tip the balance in my favor again, I pull up the weeds and throw them aside so their remaining seeds cannot overwhelm the space. This is made easy by the damp shade and deep soils they created for their roots. At the same time, I pull the beans I find and strip them into a bicycle basket and dump them on the patio table, although any blanket or tarp would do. Then I scatter buckwheat on the open ground to hold the soil through winter, a “weed” of my choosing. Soil should never be left bare if it can be helped, and if approached intelligently, there is never a need.

Dry Bean pods sur la table

Traditionally, beans were put on the tin roof to dry. Over the tin, if you’re in the dry south, or under, if you’re in the rainy, dewy north. Before tin was available, the pods were threaded on a string and hung on the cabin wall. Then you’d pull out a basket when your friends were over and shell them on the porch. You weren’t doing anything while talking anyway, and it was fun and satisfying. However, as I have to go to work on Monday, I get impatient and we shuck them in the afternoon sun and throw them in the dehydrator. They must be fully dry or they will mold in the jars, yet they mustn’t overheat or it will kill the seed. In the past, a shelf by your wood stove would have served the same purpose. This beautiful variety is called Tigereye, from Seeds of Change. Strangely tropical, this (replantable) purebred flourishes here in wet summer heat while soldier beans and other New England varieties languish. I planted perhaps a cup. As you can see, it returned over 2 gallons. This is what you’d call “tangible return-on-investment,” a positive “Energy-in, Energy-out” ratio of 32:1. This is how you know it is worthwhile, although it does not account my time. But what was I going to do otherwise? Read more about financial fraud and destruction? What good would that do? With my food, my life, under my own control, it's no longer as important to me whether markets freeze up or not.

Beans, shelled and dried

This is all of the non-cannelloni/non-black beans we need for the year, and what was my investment? $2 for the seeds, $2 for the field, taking in $6 worth of beans—but I already said food is so close to free as not to matter. What we get a variety of bean that’s unavailable, wonderfully beautiful, which has a flavor unmatched, for merely the use of my free time. Square feet? About 120', the size of a one-car garage.

A modest harvest

Less tangibly, our food system is quite long and increasingly fragile. What growing provides in these troubled times is that intangible called “resilience”. It gets me off the single-provider plan—one income and one supplier, and puts my life more under my long-term control. That costs and like other insurance, the accrued benefits aren't visible while you're making the payments. For simple as growing food is, to grow in quantities necessary to live on you need the field already broken, the seeds already at hand, and several year's experience under your belt. During the flood is not when you want to buy a rowboat. Landfall of the first hurricane is not when you want to buy plywood. These things may never happen, but history says that eventually they will. Our nation is no exception.

Should the knowledge of these things die, as they are dying now, they cannot easily be recovered, living as it does in the minds of ten-thousand aging men and women, each knowing only what works for them, in their own area. Neither can any book tell you how things must be done on your property, in the desert, in the mountains, at the bottom of the hill, by the lake, in the sand, in the clay, in the snow. Nor can I advise any other, as conditions a mile from here are different than mine. Knowledge, being the cheapest to acquire, is also the most expensive—it will cost all the years of your life.

"Experience is a dear teacher, but fools will learn in no other." --Benjamin Franklin

Gardening is not assembly-line work. You can’t read a book and assemble your product by the numbers. Or rather I should say that NO skill is able to be picked up without experience: that’s the difference between information and knowledge. The internet provides a fire hose of unfiltered information. But without long watching, long practice, and personal experience of how to apply it, that knowledge remains as useless as a box of bolts, useful only if applied by the skill and imagination of the workman whose intelligence knows what to add and what to take away.

Butcher Corn

You expect to read a book on smithing and make yourself a sword? Leave that to the movies. Reality is more like a guitar: easy to play badly, but taking a lifetime of experience to master.

So this is what’s doing at Apple Lawn Farms this week.

If you look behind me, you’ll see a colonial variety of “Bloody Butcher” field corn. Another purebred, non-hybrid with viable seeds, it’s wildly abundant, proven over generations of harsh conditions, and growing over 12’--so high you literally cannot harvest the ears without a ladder. So why are we growing terminator seeds, or specialized hybrid seeds which are equally unviable? Well, because it’s easy and we can. But within a few years I could grow enough seeds to plant the township with purebreds.

We can do these things. As food comes off its all-time, rock-bottom lows, I rather expect we WILL do these things. And what’s more, YOU can do these things. In your backyard, with the minimal effort and expense. Grow them for the happiness of watching things grow, making a rich and beautiful life at your house, a thing money can’t buy.

Drain the soaked beans and place in a large pot with water to cover. Simmer over medium heat for two hours or until soft, adding water if it's needed. Drain any remaining water.

Saute the onions in butter or olive oil until they soften. Mix with the rest of the ingredients and then the beans. Pour into an appropriately sized ovenproof dish and cover, either with a lid or tinfoil. Bake in a 350 degree oven for an hour, give or take 15 minutes or so. It's not a picky dish.

The beans can also sit in the fridge for a day or so, after being mixed together but before being baked. They're really very agreeable.

They make a great meal with cornbread and any green vegetable.

Extra Credit:

For the ultimate in low-work eating, try grapes:

For $12 a vine you can have a gallon of fruit a every year for 100 years.

I am doing my best to respond to correspondence but am unable to keep current.

If you would like to post a comment where others can read it, please go to DailyJava.net, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Wednesday, September 29, 2010

The "free market" (a convenient fantasy in economies dominated by State/crony capitalism) does not distribute resources equitably in eras of permanent scarcity. Rationing works if it operates alongside a transparent market rather than attempts to replace it.

There's only one little problem with Medicare/Medicaid: there isn't enough treasure in the Universe to pay what's been promised to 45 million (soon to be 60 million) aging/aged citizens, each of whom can burn through $500,000 or more in the waning days of their lives. Medicaid covers another 60 million low-income citizens, and there are few limits on what can be billed to Medicaid.

There are few limits on what Medicare spends on each recipient, most of whom contributed via Medicare taxes and monthly fees perhaps 1-3% of the average outlays expended on them, which are in the neighborhood of $250,000 - $500,000 each.

There is every incentive to bill the system and virtually no incentive to limit medications, tests, surgery, etc.

Then there is the culture of entitlement which permeates the U.S.: everyone "deserves" "the finest care" regardless of cost because "it was promised to me" and "I paid my fair share."

Medicare taxes are $1.45% of payroll for both employer and employee, and that is a recent number; in the "old days" it was near-zero. That means a person who has earned $1,000,000 in the era since Medicare taxes were 2.9% of payroll contributed a total of $29,000. People like my Mom who worked sporadically and for low wages paid perhaps a tenth of that.

The costs of Medicare are completely out of scale with the contributions paid. Medicare is thus a massive transfer of wealth from the generation collecting the benefits to the younger generations. My Mom had a one-hour procedure last year on her big toe: cost paid by Medicare $17,000. My buddy's Dad went in for treatment of a gallstone and was hospitalized (against his will, mind you) for a few days: cost to Medicare $120,000.

Many of the costs are for medications, procedures and tests of little to no value. But since Medicare/Medicaid is paying, and you might get sued if you "denied treatment," then give everybody everything, just in case.

Here is an example from the real world, submitted by Dr. "Ishabaka":

Doctors also have questioned the value of Genentech's Tarceva for pancreatic cancer. The $4,000-a-month drug won approval by boosting median survival by a mere 12 days. Here's how to think about this cost: People who added Tarceva to standard chemotherapy lived nearly 6 1/2 months, versus 6 months for those on chemo alone. So the Tarceva folks spent more than $24,000 to get those extra 12 days.

I have covered the fundamental, structural insolvency of Medicare/Medicaid many, many times in depth:

Everyone who works in the front line of the dysfunctional American sickcare system knows it's broken, and knows that some form of rationing is the only solution which can distribute limited, costly care with a modicum of fairness.

All purely "socialist" systems (that is, private insurance and care is banned, the Central State has a monopoly on providing all care) have de facto rationing systems in which those at the tail end are on waiting lists. The system effectively weed out the weak and ill, as those people die before they get treatment.

Here are two key characteristics of rationing which works. I know we as a nation have been brainwashed that "rationing doesn't work," but that is simply not true if you set your biases aside and examine the history of say, civilian rationing in World War Two. Was it perfect? Of course not. Did it get the job done? Yes.

Not all rationing systems work, but some do. The key characteristics of rationing which works are:

1. The governed believe the system is fair and justly administrated.

2. The rationing system exists alongside a transparent open market providing the same goods and services for cash.

In most rationing systems, the Central State attempts to control the entire market, which instantly creates a lucrative black market.

National healthcare systems which have some hope of being sustainable, such as the French system, offer what is in effect a limited, rationed amount of care paid for by the Central State, and a parallel private system of insurance and cash which covers everything the State does not provide. The vast majority of French households buy private insurance.

In the U.S., a rationed system might have these characteristics:

1. There is no "free" care except at charity institutions which decide to offer care for free. All government emergency room services must be paid in cash: $20 for minor stuff that shouldn't even be emergency room cases, $50 for more serious cases and $100 for acute-care.

Exceptions are made for those living out of shopping carts or in cardboard boxes. The "poor" with cellphones, cable TV, new Nikes, etc. will have to forego some other purchase and start budgeting for medical care.

2. A national catastrophic insurance system which covers those serious diseases which are not lifestyle diseases: brain tumors, ALS, psychosis, etc. The triage order is common-sense: children first, those adults in their prime working/parenting years next, the elderly (over 75) last.

I know this is contrary to our current fantasy that everybody can get everything regardless of cost, but at some point we will be forced to do some triage. If I make it to 75, I've already had a good life. Some unlucky soul/parent who is 42 and has a brain tumor deserves scarce resources more than I do.

If I chose to smoke, drink massive amounts of alcohol, generally let myself go, eat crappy food, etc., then the choices and consequences are both mine.

And I always have an alternative: divert my income away from other expenses and pay for whatever care I want in cash, or with private insurance I chose and paid for in full.

3. Care provided under the government plan is scaled in by cost. Marginal treatments like Tarceva will not be offered. If a patient wants Tarceva, they can pay for it themselves.

4. A first-come, first-serve network of government clinics on the Veterans Administration model (national information sharing, everything owned by the government lock, stock and barrel and all staff paid by the Central State) offers prenatal and preventative care only. Services are paid for in cash, like emergency rooms, and the basic idea is to encourage prevention rather than highly profitable "care" or management of preventable lifestyle diseases.

The services offered would be cheap and scalable: for example, blood pressure tests, prescriptions for cheap, generic blood-pressure meds with few side-effects. If the patient wants some other med, they can pay for it themselves or buy some private insurance and battle the insurance company for coverage.

I know many complain about the VA model--long waits, minimal niceties, etc.--but once again we are talking about triage and personal responsibility: if you don't want the rationed government care, then you have a choice: save money and pay for it yourself, or lower your risks for diseases which can be avoided by becoming devoted to maintaining your own health.

An example of taking charge of one's own health is comedian Drew Carey, who chose life over death by changing his lifestyle and diet.Drew Carey: No More Mr. Fat Guy. Yes, he is wealthy and could hire personal trainers, but everything he did was common-sense.

Americans like to offer the excuse that they "didn't know it was bad for me," but this is a transparently absurd claim. Does anyone bellying up to the fast-food counter really think it's healthy for them? Of course not.

Americans are also prone to complaining about their genetic predispositions. Yes, it is true: we are not all perfect specimens. I have predispositions to heart disease, high blood pressure, high cholesterol, melanoma, to name but a few, and so the obvious choice is to lead a life which minimizes the risks incurred by lifestyle. That is not a difficult concept to grasp; we all understand it, even as we resist it.

The question for our deeply corrupted crony-capitalist, Elite-dominated society is whether we can offer rationing which is actually fairly administered. If the Elites gain control of the machinery and skim the resources off behind closed doors, as they do with everything else in America, then the consequences will be dire indeed.

The consent of the governed is a requirement of democracy. If the governed no longer consent to Elite skimming, fraud, embezzlement and corruption, then systemic change will occur.

I fully expect gasoline to become permanently scarce and rationing will offer a transparent solution to the resulting inequalities. As I have often explained here, oil is priced on the margin, which means a 1% shortfall in supply can trigger a 10% jump in price, and a 10% shortfall can unleash a 300% price hike.

For example: urban citizens would get chits for 40 gallons a month, suburban residents would get 60 gallons (hello, car-pooling) and rural residents would get 120 gallons.

Here is the key to how this would work: you can sell whatever you don't consume on the open market, for whatever price you can fetch. Wealthy people would pony up whatever the market would bear because it would still represent a tiny slice of their household income.

Those of lesser means would have a huge incentive to conserve and make some side money by selling their gasoline chits.

Once again, I know we've been brainwashed that "rationing doesn't work." It does redistribute essential resources equitably when it exists in parallel with a transparent market for the same goods and services.

I am always dumb-struck by the rigidity of the status quo and those who resist adaptation. The number of people who will claim this or that is "impossible" is legion.

To provide but one example of many: when the Loma Prieta earthquake damaged the Bay Bridge, the flow of tens of thousands of vehicles a day between the East Bay and San Francisco fell to zero. Commerce without this traffic was widely deemed "impossible," and various doom-and-gloom scenarios were breathlessly tossed about (everybody loves a doom-and-goom scenario, the worse it is the better, just as with horror films).

Guess what: everybody got by. The BART subway system added trains, essential traffic went around via San Jose, and very quickly life went on without the "essential" Bay Bridge. Traffic was not horrendous; people adapted and made common-sense choices.

Rationing works when it is fairly administered and when a transparent, open market for the goods and services being rationed exists side by side with the rationing. That gives everyone a choice in how they respond, and what they prioritize as in their best interests.

I am doing my best to respond to correspondence but am unable to keep current.

If you would like to post a comment where others can read it, please go toDailyJava.net, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Tuesday, September 28, 2010

Dependency on the State has crippled large segments of America, creating a culture of destructive addiction, entitlement and dishonesty that precludes enterprise, thrift and thus upward mobility.

Though Central State entitlements were designed to alleviate poverty and spread opportunity, they have had the perverse consequence of undermining the culturalecology of enterprise which fuels upward mobility.

The long, oft-times difficult Federal effort to eliminate officially and culturally sanctioned prejudice and poverty and encourage integration has largely been successful in formalized America, but it has also had unintended consequences.

It has been successful in the Armed Forces, the government and in enlightened Corporate America. But outside these strongholds of rules and regulations, America remains highly segregated financially and ethnically. This is a verboten topic because it doesn't fit with the "official" ideology of a desegregated, upwardly mobile melting-pot society.

I know this is painful and difficult for us as a people. We prefer to believe that upward mobility (and by extension, melting-pot integration) is not just possible but inevitable, as long as "the government" "helps out" and "increases opportunity."

The terrible irony is that some aspects of "government help" have unwittingly crippled the very spirit of enterprise needed to power upward mobility by reinforcing and rewarding dependency and addiction.

The two are psychological siblings. Addicts fear the absence or withdrawal of the one "source of life" they have come to depend on to function. It can be wine, whiskey, smack (heroin), synthetic smack (oxycontin etc.), cocaine, sex, gambling, online porn, and so on.

The key trait of addiction is the atrophying of all other sources of well-being, self-worth, and stability. Almost by definition, a healthy human being draws upon a rich network of spiritual, psychological and material/financial resources; a healthy life is constructed like a pyramid, with a broad base of people who they care about and interact with, sources of income, "social capital," skillsets, and a value system which nurtures enterprise, thrift and security.

Small business is inherently reciprocal. You have to provide services and supply goods of the value promised, with integrity, or your business will be avoided by others.

In Corporate America, the equivalent is a reciprocal network of professional contacts and associates. If you help and mentor others, and take on the scutwork when asked, then you can turn to those you aided to help you get something done or find a new job.

Moochers can milk the system for a short time, and then they will be shunned.Moochers are parasites who cannot build a sustainable ecology of contacts and goodwill because they are taking without giving anything. Help will be provided grudgingly, and no one will mourn the moocher when he/she leaves or gets fired.

An ecology of enterprise is reciprocal in nature. A broad pyramid-like base of interwoven networks supports reciprocal relationships, growth and adaptation.

The addict is the exact opposite, an inverted pyramid stood on its point: totally dependent on the single source of well-being (diseased as it is, it feels like "success" to the addict), inherently vulnerable to any disruption in the inverted, unstable system. The addict's world is a scorched-earth desert with only one "spring."

The sole-source dependent offers little to nothing in return; instead, the dynamics of dependency is deeply unhealthy, breeding a psychology of resentment, entitlement and an atrophying of self-reliance and self-confidence.

The financially prosperous and secure individual in private enterprise relies on a broad base of connections, subcontractors, suppliers, clients, professional contacts and resources to help them adapt to changing market conditions.

Those of you in small business know what I mean: if you don't quickly develop an entire ecology of suppliers, clients/customers, resellers, advisors and allies, then you will fail. If you fail to perform as promised, do not provide a useful service at competitive prices, you will of course fail. But success requires a complex inter-connected network of contacts, partners, mentors, skillsets and experience.

These intertwining networks form an ecology which others call "social capital": stabilty and prosperity flow not so much from monetary capital (that can be squandered in short order), but from the ecology of social capital invested in enterprise.

Social capital can be acquired by everyone who understands its value, and who sets a goal of consistently offering reciprocity and integrity in an enterprising manner. This is not a class-specific concept: the working class individual can achieve security and prosperity from their social capital: a successful septic-system contractor, for instance, might be as well-off in terms of income and assets as an upper-middle class manager in Corporate America.

The reason that the upper-middle class individual may well earn much more income than his/her peers is not necessarily due to being smarter; the difference is usually in the quality and depth of their social capital. Going to Elite schools leads to meeting more powerful, better-connected people. Learning highly valued specific skills, and deploying those skills in service to financial and political Elites, earns one access to circles of expertise and connections which are inaccessible to those below that class.

Just having capital will not guarantee success. Rather, establishing the ecology of enterprise, acting with integrity and bringing the right mix of skills and experience will attract capital.

In contrast, State-dependent enterprises don't require anything but revolving-door contacts within the Pentagon, NSA, Medicare, etc. This is not "free market" capitalism, it is State/Corporate crony capitalism.

Crony capitalism is like an addict: if the Central State withers, so do the crony-capitalist "enterprises." All these businesses are "Federal entrepreneurs," totally dependent on State contracts, contacts and swag for their survival.

Total dependence on the State is a key trait not just of Crony Corporate Capitalism but also of Third World kleptocracies (which is why the U.S. is also a kleptocracy in key ways). Both are partnerships of the State and privately controlled cartels which skim much of the national income and redistribute it to their own benefit.

Which would you rather depend on: a pyramid with a broad base, or one stood on its point? That is the acme of instability and insecurity.

Consider the person at the bottom rung of American society: the transient homeless. Not only do they not have any assets or income other than government aid, they also have no network or ecology of supportive contacts.

Their life is an upside-down pyramid: they rely solely on the government for their survival. The network that other non-transients might have developed over time-- membership in a church, the reputation as a giving neighbor, reciprocal bonds with former colleagues, family and close friends--all of this network of support is absent.

In a similar fashion, the network of contacts of those laid off from Corporate America also atrophies over time if unemployment become semi-permanent. The longer one is out of the workforce, the fewer functional contacts and alliances one can maintain.

Thus the more "help" and "opportunity" the Central State offers through dependency-enhancing entitlements, the more it erodes the spirit of enterprise and the "social-capital" networks which enable prosperity and security.

The person who falls under the spell of State dependency unknowingly sacrifices their autonomy, and their spirit of enterprise fades with every monthly check. This dependency is pernicious on a number of fronts: it saps self-confidence, self-worth, reinforces political complicity with the Status Quo, and hollows out the recipient's integrity.

Over time, there is something deeply inauthentic about "welfare" (or "relief," as it was once called), be it individual or "corporate welfare." The dependency ontologically(that is, necessarily) creates incentives to "game the system"/ manipulate the single source of sustenance (The Central State and its fiefdoms/bureaucracies). It encourages bribery to gloss over any disqualifying factors and whatever lying and dishonesty are needed to fake compliance with requirements and statutes.

Enterprise always disqualifies the recipient, so enterprise is the first casualty of the entitlement dependency. Earning money "on the side" is forbidden, as is informal business. The incentives are all on increasing the swag drawn from the State, deepening dependency, while escaping dependency by building a reciprocity-based social-capital network is discouraged.

The key difference between "help" and dependency is that help is temporary while dependency is permanent. Unemployment was designed to be a temporary bridge between jobs. But as small business employment is gutted by systemic forces (seeSolutions Part One: Informal Enterprise), then formal jobs will become increasingly scarce.

The very worst position to be in is one without any ecology of enterprise, reciprocity, contacts, colleagues, friends and family--yet this ecology is precisely what is eroded by dependency on the State.

This is why I suggested in Is Paying 10 Million People Not to Work Really a Good Idea?(September 21, 2010) that the unemployed should be required to work part-time for a non-profit, church, temple, city agency, etc., to maintain whatever social capital and skills they have, and build new layers of that ecology of enterprise.

What we as a society and economy need to do is offer "help" in building enterprise, reciprocity, adaptability, self-confidence and integrity. Never-ending entitlements erode every part of the foundation of long-term security and prosperity, and incentivize every negative aspect of dependency and addiction.

The deserted wasteland of urban America is directly related to its dependence on Central State entitlements, and the deserted "center" of the U.S. economy is likewise barren due to the dominance of highly concentrated wealth and capital in the Central State and its corporate-cartel partners.

The nation's ecology of enterprise has been stripmined, eroded and discouraged. Instead of broad, strongly grounded pyramids, the U.S. economy has been reduced to a series of highly unstable inverted pyramids, teetering in a barren landscape of debt-serfs and crony-capitalist cartels totally dependent on State largesse.

This dependency requires a fatal complicity with a doomed status quo.

I am doing my best to respond to correspondence but am unable to keep current.

If you would like to post a comment where others can read it, please go toDailyJava.net, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Monday, September 27, 2010

Devising solutions requires an accurate assessment of the problem to be addressed. In the U.S., that requires a painful appraisal of all that we prefer not to see.

Readers often ask for solutions to the pervasive problems we face, individually and as a nation, and this week I will do my best to offer solutions. My solutions will not be reducible to easy-to-digest bullet-point policies, nor will they align with standard-issue ideological "solutions."

I consider these topics "important," which means my readership will plummet. (Readership spikes on "preaching to the choir" about how rotten the system is; far-ranging solutions which cannot be reduced to simple policy tweaks are deeply unpopular.)

Everybody agrees the system is rotten and broken. But once you break through the thin brittle crust of surface agreement, then that unanimity is quickly revealed as fragile. Nobody can even agree on what the problems really are; many cling to the ideologically convenient closed-circle of policy tweaks (raise taxes, print money, give more government benefits, send in more troops, offer tax breaks for small business, etc.)

In my view, we all long past the time that ideologically convenient policy tweaks will be useful; the problems are far deeper than the tax structure or even the Global Empire.

What we must face is the global fantasy of "endless growth of consumption and debt" is ending. Yet what we find in the political/financial status quo and the mainstream media is a uniform consensus of "liberals" and "conservatives" that what the U.S. economy needs is "a resumption of growth"--that which is impossible for a variety of macro-economic reasons I have catalogued in Survival+.

One key tenet of the Survival+ critique is that how we frame the "problem" defines the "solution." For a "problem" to be ideologically convenient to "solve," it must be narrowly defined.

Thus we end up with intrinsically trivial "debates" between "liberals" and "conservatives" and "libertarians" on tax breaks for small business, the policy parameters of sickcare "reform," the exact nature of various Imperial occupations of foreign territory, and so on.

The core reason why these "solutions" will solve nothing is that the actual problems are being ignored and denied. To use a well-worn metaphor, all the "political" debates in the U.S. are akin to the squabbles on the Titanic about who gets to enter the first-class lounge and who is relegated to steerage as the ship sinks steadily lower in the water.

A few prescient souls from the upper-class decks are already away in sparsely populated lifeboats; those left on-board will drown regardless of what class they inhabited in their last moments of life.

As the ship goes down, the "politicians" are in effect arguing about what music should be played in the second-class public rooms to placate the passengers and give them the comforting illusion that everything is under control, and scurrying around to re-arrange the proverbial deck chairs so they don't slide away as the bow sinks into the freezing sea.

If we define the problems accurately, then the level of pain skyrockets. In this way, nations are precisely like individuals. As individuals, an honest appraisel of our problems requires probing everything we seek so desperately to avoid seeing, much less exploring.

There is much suffering in the U.S. right now. The level of suffering is not uniform; perhaps a fourth of Americans are largely untouched by the Great Recession: Federal employees, members of the Armed Forces, the millions of people living off contracts with the ballooning Federal National Security State and Empire, retirees with fixed pensions (government/military/state) and the Wall Streeters divvying up their $117 billion in employee compensation. The top 10% of earners--those who account for fully 37% of all spending--have been touched lightly if at all.

For these fortunate few, incomes have remained unaffected, though their perception of their relative wealth may have declined. Another 10% - 20% have been affected, but their lifestyle changes have been modest. (Cutting back eating out from five nights a week to two, etc.)

Cities with global tourist trades (New York, Los Angeles, San Francisco, etc.) have seen their coffers swell with tourist dollars; the health of the city's finances may appear to be improving. The streets are crowded now, but it's all a false dawn.

The ranks of those left unscathed will dwindle with time; by 2014, many who reckoned themselves secure will have discovered otherwise.

There is always human suffering present, regardless of the wealth held by any group or society; but beyond this baseline, suffering can quickly rise to unbearable heights.

What constitutes "unbearable" depends on the baseline. Humans habitutate very quickly, and what is at first unbearable soon becomes normal.

This is part of what I term the politics of experience. Like the frog in water slowly raised to a boil, we as a society have "normalized" situations, behaviors and situations which are visibly destructive and perverse. Accepting this twisted self-destruction as "normal" means we have entered a place with no exit.

So the first step is to examine what we fear most, what is verboten to speak or question, to uncover all the inadequacies we want so desperately to avoid owning up to, and correctly identify the problems we face. If we cannot do that because it is inherently painful and will require systemic change, then we have failed before we have begun.

If we stay within the comfortable confines of ideologically convenient definitions of the "problems," the "solutions" will intrinsically be nothing more than giving the alcoholic a free beer or the gambler another few free chips to play and lose.

The suffering in the nation affects me deeply. I cannot absorb too much of it lest it cripple my own efforts to take care of myself and those around me. I think in this way I am quite average.

I am also quite average in terms of the standard metrics of our economy: my total gross unadjusted income in 2009 was $38,000 (according to the Census Bureau, average earnings in the U.S. are about $42,000 annually); my taxable income was considerably lower, but high enough that I paid thousands of dollars in Federal income tax, self-employment tax and hundreds of dollars in California state tax. I am not poor; like many Americans, my primary asset is real estate, and we pay five-figure property taxes for the privilege of owning a bit of land in California.

Even the vaunted "middle-class entitlement" of mortgage interest deduction doesn't mean much to us; with a 15-year mortgage heading to zero in a few years, the interest we pay is not enough to make much of a difference in our taxes. (The vast majority of the mortgage payment is principal.)

Ironically, if you pay your mortgage down quickly, all that cash comes out of your taxable income. The system doesn't reward escaping debt-serfdom, it rewards taking on more deliciously deductible debt.

Why does any of this matter? It matters for the same reason that ethnicity, locale and religion matter in America. Though on a superficial level, popular culture binds us all together, behind this media-saturated facade there are many quite different Americas. Which ones you see, much less experience, depends heavily on your income, class, job, asset base, ethnicity, locale and religion.

Longtime readers know my family contains a lot of ethnic diversity: my niece is African-American/Anglo, my stepmom is Mexican-American (born in the U.S.), and my wife is Asian-American (born in the U.S.). I have often lived in situations in which I (paleface) was a minority (inner-city Detroit 1968, for example).

I mention this because the reality is stark: if all one knows is prosperous suburbia, leafy streets and stable, lucrative employment in the government, academia or corporate America, then one's knowledge of America is paper-thin.

This is why most of the avalanche of "policy papers" spewed by think-tanks and other ideology mills are worthless. The research and the writers come with pre-set ideological and experiential blinders which render their "solutions" ("policy fixes") meaningless to the lived experience of many Americans.

One's ethnicity, locale (urban, suburban or rural), class/wealth/education/income, religion (or lack thereof) and family ties will shape and define the politics of your experience of America.

This is important to stipulate because what I say next may strike you as "untrue" or "unfair" if your experience of America is highly selective/protected (i.e. you live and work in posh enclaves of N.Y.C., L.A., S.F., northern Virginia, etc.)

Urban America has acquired many of the negative attributes of Third-World cities and few if any of the positives. What are the positives of teeming, overcrowded Third World cities? I cannot speak to all such cities--some "work" and some don't--but cities such as Bangkok are teeming with the opportunities offered by informal enterprises.The opportunities to improve one's income by enterprise and hard work are what draws poor people to such cities. That was once the case in America, too.

There are street vendors hawking everything from watch bands to handmade sweets to haircuts. Are these people wealthy? No. Are they productive? Yes. Are they getting by? Yes. Do they have self-respect? Yes. Do they have the dignity of labor and making their own way? Yes. Are they performing useful services? Yes. Are they operating with integrity? Yes, or they would not have any customers. Are they begging? No. Over three extended trips over the past decade, I don't recall being hit on by a single beggar in Thailand (though many locals icily assumed my wife was a prostitute, as she is ethnically Asian and accompanying a round-eye.)

I am sure many of you have similar experiences in various other countries; in some, begging is ubiquitous (my "Big Nose" friend and I were constantly beset by hordes of beggars in Chinese train stations, for example) and relatively rare in other equally poor nations.

Culture matters. It's not just a statistical matter of relative wealth or poverty or the redistribution /skimming of wealth via the Central State.

In Bangkok, certain streets completely change-over three times a day for various types of commerce. In the early morning, vendors set up for the breakfast crowd. These vendors pack up and leave as noon approaches, replaced by the lunch vendors. By late afternoon, these vendors are gone and the evening enterprises set up their stalls and carts. Huge numbers of people earn livelihoods in each single block.

What is absolutely striking about most of urban America is how devoid it is of informal enterprise. We in America have overly formalized and thus destroyed vast swaths of enterprise. Food must be prepared in approved kitchens (which all cost thousands of dollars a month to lease), goods must be sold from storefronts and restaurants with handicap-accessible bathrooms, and so on.

A very powerful capitalistic form of self-help and upward mobility has thus been destroyed. I think this is the "secret" behind the often-remarkable upward-mobility successes of immigrants from Asia, Africa and the Americas: they come from societies which enable and thus reward (not as "official policy" but as a culture) small-scale entrepreneural hustle and thrift.

That culture has largely been extinguished in the U.S. by regulation and high-overhead formalization. Thus to "start a small business" in America you must borrow tens of thousands of dollars and have enough capital to survive the long permit/licensing process. You start business deep in debt and with horrendous overhead: high rent, high fees, high taxes, payroll taxes, healthcare costs, and on and on.

Is there any wonder why so many storefronts, factories and business parks are empty in America? You have to be insane to start a formal small business here, and insane to hire formal employees.

This is the hallmark of Third World countries: the "formal" layer is populated by government bureaucrats and workers, and those employed by a handful of global or regional cartels with enough wealth to navigate the formal bureaucracy (via bribes in the Third World, via "food safety compliance" and other regulatory enterprise-traps in the U.S.)

Between the State and its favored cartels and the informal "black market" economy is a desert. Legimitate small business is relentlessly squeezed out of existence by the pricing power and politically enforced advantages of global cartels and the taxation, bribes and fees of The State.

Saddled with high State-imposed overhead, formal small businesses can't compete with street vendors, unlicensed contractors, etc. So they go broke and close their doors, either slipping into the informal economy or becoming dependent on The State.

This is the reality of present-day America: the engine of small business is being destroyed. This is why I have long predicted that the 127 million jobs in the U.S. (down from 136 million in 2007) will slowly erode to the 100 million-job level as small business is further ground down.

Yes, if your firm manufactures highly specialized equipment for the global cartels, you can make a living. If your business is profitable, the cartels will probably buy it up, or buy a competitor and start pricing you out of business.

It is my informal observation that most of these sorts of still-successful small businesses were founded a decade or more ago. Very few are recent startups. Upward mobility via enterprise and thrift has ground to a halt in America. Yes, a few outliers are constantly hyped in the Mainstream Media--Twitter! Facebook! (together they employ about 3,300 people--whoopie, the nation is being saved by the vast engine of social media)--but how many new small businesses do you know of first-hand that are not just clinging on but prospering?

There are multiple ironies in this. So-called "American-style capitalism" is basically the global, Imperial domination of cartels and capital; on the streets of America, The State has squeezed formally legitimate enterprise out of the culture.

Those with no experience of actual small business cannot understand this. They point to the well-tended streets in tiny European countries with a third the residents of Los Angeles County and wonder why those highly regulated, high-tax environments can't be replicated in our nation of 320 million.

The sad truth is formal small business is being ground down in Europe, too, except where the Central State subsidizes them instead of taxing them to death. Up to 40% of the economy is informal/black market in nations such as Italy.

The flip side of suppressing/eradicating informal, bootstrapping-type upward mobility is the institutionalization of dependency and addiction. More on that tomorrow.

The solution to rising poverty and insecurity is cultural as well as political: it is to stop destroying small-scale enterprise and instead enable micro-scale informal businesses.

Here is a final irony to consider. Street food is ubiquitous in Thailand, but if you read traveler accounts, you rarely if ever encounter food poisoning as an issue. The food is brought in fresh in the dark hours of early morning, and it is cooked fresh for customers over high heat. The culture is one of cleanliness.

More people are sickened and killed by Corporate Agribusiness-spread food poisoning in America than all the street food stalls in Thailand. The truth is that agribusiness--stuffing tens of thousands of genetically distorted chickens in warehouses and dousing them with chemicals to suppress disease, for example--creates the ideal environment for contagious and hard-to-control animal-borne diseases.

Small-scale, informal food chains drawing from a variety of farms and sources are inherently less prone to dangerous infections.

The more you concentrate wealth, power, and indeed, chickens, the more vulnerable your system becomes to distortion, runaway feedback and collapse.

I am doing my best to respond to correspondence but am unable to keep current.

If you would like to post a comment where others can read it, please go toDailyJava.net, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Saturday, September 25, 2010

This guest essay is by Michael Reps, Director of Yield Qwest, a company which serves Americans seeking to emigrate to New Zealand. The essay is presented as informational for those considering relocation options. Disclosure: Oftwominds receives no fee or commission from the service. All locales have pluses and minuses, all involve trade-offs.

Home Schooling in New Zealand: They actually pay you here

I was busy helping one of my clients gain employment here under the Skilled Migrant program for his particular skill set. One of the considerations, among the many I have to look at, is schooling for the families’ children. In this case I was advised that they would like to home school.

Easy enough, I suspected that there would be some type of system in place to accommodate this, so I checked with our Ministry of Education and unbeknownst to me, I find that New Zealand actually pays parents to Home School. In fact, the amounts are in the form of an annual 'supervisory allowance' of $743.00 for the first child, $632.00 for the second, $521.00 for the third, and $372.00 for each one after that. This is paid retrospectively, in two installments each year, January and July and can also be used to pay for teachers.

I had thought that the rational for this subsidy was because the overall aggregate head count for students in schools would be lower and as a result, the aggregate costs should be lower and passed on to the taxpayer. After all, shouldn’t the public sector serve the private sector, and if the private sector could save public dollars through educating their own children, shouldn’t they be compensated?.

However, there is more to this. Some of the drawbacks to home schooling may be:

1. Reduced income as one parent is at home educating rather than earning an income

2. Giving up at least part of your house to children’s projects

3. The need to make a greater effort to involve your children in activities with their peers outside of the home for socialization reasons (read more about this aspect of home schooling under the heading "What about socialization if I home school?")

4. A lack of exposure to an assortment of ideas and opinions that the student is more likely to receive if he or she is schooled face-to-face in a school environment

5. The fact that you are ultimately responsible for the education and learning of your child/children. This task may be daunting for some parents who choose to home school.

It became apparent to me that in this economic environment where two income families in the US have been relegated to either one income or two half income families, that as a method of helping families sustain their households while the economy reshapes itself, there would be greater reliance on multiple incomes from varied sources in the form of part time work.

I can hear the arguments now; that if the US adopted a New Zealand Model for Home Schooling, that parents would simply remove their children from public education so as to gain a subsidy. I think one can always find exceptions to the rule, but I can also imagine that instead of paying a direct subsidy to families, that a separate account can be established to hold the funds for the children’s future education costs such as University or Trade School. This then removes the short term financial incentive and still benefits the children and family.

I bring this topic up, not as an advocate of Home Schooling, but as an advocate of free enterprise. I believe as the US Economy worsens there are going to be ongoing financial struggles with varying interests groups in the US Economy, and in this case, between the public sector and private sector over educating one’s children.

I believe the US Economy is going through a tremendous rebalancing that could take over a decade to resolve. It is during this rebalancing that new ideas are required and innovations will be welcome. If progress is going to be stunted because of public sector interests, it will take even longer. More importantly, the longer the economy rests in a stasis in hopes that it can get back to 1996, the longer people will suffer.

By logical extension, I also see that if the US were to acknowledge the private sectors tangible contribution to public services, a precedent could be set to initiate other economic models that facilitated a public benefit at reduced public cost. Those that find themselves looking after their parents could be given the opportunity to qualify for home nursing subsidies for elderly care services to name just one.

At the epicenter of this struggle will ultimately be the solvency of municipal governments and their ability to cope with lower tax receipts and reduced services. And if it truly does take a village to raise a child, wouldn’t the villagers want to be assured that the village itself was sound enough to maintain order and solvency in the future?

It would be more productive to find ways of saving the tax payer but at the same time, maintaining the services that tax payers have benefited from. The major obstacle in all of this is the established bureaucracies and special interests. At some point, though, if those bureaucracies become insolvent, this will become a moot point. If paid Home Schooling works in New Zealand, I see no reason why it wouldn’t work in the US. It could just be a matter of when.

I am slowly catching up on correspondence after several weeks away from my desk --your patience is appreciated.

If you would like to post a comment where others can read it, please go toDailyJava.net, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Friday, September 24, 2010

The housing bottom many see in 2014 will not usher in a new boom; rather, it will merely mark the transition to a decade (or more) of stagnation.

Take a wild stab at when housing will bottom, and you can find an analyst's opinion to support your guess: one respected housing expert sees a bottom in six months, while equally experienced observers see a bottom in 2013, followed by a decade of slow improvement.

If history echoes, as it tends to do, then the last mini-bubble, bust and aftermath offers us an instructional model of how housing bubbles play out.

Why is this so? For two reasons: human psychology reliably swings between euphoria and caution in the marketplace, and the business cycle of rising debt and over-expansion followed by contraction of credit and retrenching is a feature of free markets.

One standard way of assessing the underlying valuation of housing is to compare it with income. When homes are soaring in value, they rise above the historical average of 4 times median household income. When houses fall in value, they dip to 3.5 times median household income.

Ned Davis Research and CNBC recently published a chart of this ratio, housing prices to median household income, which I have annotated in italics.

The ratio accurately reflects peaks and valleys in residential real estate: housing prices rose to a peak in the late 1970s, and then fell sharply in the deep 1981-83 recession. The resurgent economy boosted prices for seven years, leading to another peak in valuations in 1990.

For various macroeconomic reasons, housing then stagnated for about a decade, drifting below the historic mean of 4 times income. These factors included the relative balance of supply and demand between homebuyers and sellers, and the greater attractiveness of stocks and bonds to investors in the 1990s.

We all know the story of the Great Housing Bubble: low interest rates, disavowal of risk management, subprime loans to unqualified buyers and investor wariness after the dot-com stock market crash all led to a massive sustained surge in home buying.

This imbalance between supply (limited) and demand (rising due to the influx of marginally qualified buyers and investors) and ubiquitous mortgage-lender/investment bank fraud led to seven years of skyrocketing valuations.

Once the Federal Reserve and Federal government finally acknowledged that housing prices were in a recessionary free-fall, the Fed stepped in to maintain super-low mortgage rates by purchasing $1 trillion in mortgages, and government agencies offered a slew of programs aimed at stabilizing the housing market and home prices.

As the chart reveals, these unprecedented efforts have provided a modest stabilization in valuations. But the limits of government intervention are painfully clear: according to the Treasury Department, bout half of the modifications done in 2009 were behind in payments by the first quarter of 2010.

At this point, the guessing game moves from "when will housing bottom?" to "how much further will housing decline?" Some analysts are staking out future drops in the neighborhood of 5 to 8 percent, but bubbles tend to fully retrace to their starting point, and then dip another 10% just for good measure. "This time it's different"--yes, we heard that in 2000 as well, and the dot-com NASDAQ not only retraced all of its gains but then some. Why would housing perform any differently?

The answer is that yes, this time it is different: it's worse, because the Baby Boomers will be selling relentlessly for the next two decades. Demographics are against another housing mania as Boomers will be selling their real estate holdings to fund their hip replacements, retirement living, etc. Buyers from the smaller follow-on generations will simply not be numerous enough or wealthy enough to buy these millions of homes and vacation properties at anything close to today's prices.

There are three interesting features in the chart which suggest targets for both the housing bottom and the eventual bottom in valuations. Bubbles tend to rise and fall in symmetry, meaning that a bubble which took seven years to reach its apex typically takes about the same period to time to retrace to its starting point.

By that reckoning, the housing bubble which took off in 2001 and ended in 2007 will need about seven years to complete the retracement to historical valuations. That would put the bottom in the 2014 timeframe.

As for valuations, market watchers have long noted that "it's different this time" is a remarkably inaccurate basis for valuing anything. Thus we can look to the last deep recession in 1981-83 for some clues about where housing valuations may be heading: to about 3.5 times median household income.

This ratio of income to home prices is useful because it follows regional variations: higher income areas will have higher home prices, but the ratio will likely be about the same across the nation.

The last interesting feature is the decade of stagnation which followed the bust.

Bubbles do not arise again in the same asset class; they tend to bubble up elsewhere. Thus we can look for mania-led bubblicious valuations not in real estate but in some other asset class: silver, gold, the dollar (gasp! Sacrilege!), iridium, water, dirt, bat quano, the new gold-backed currency, the quatloo, etc.

"It's different this time" has a close and equally inaccurate cousin: "it can't happen here." Those counting on a timely resurgence in home valuations ignore the fundamentals of supply and demand at their own peril.

I am slowly catching up on correspondence after several weeks away from my desk --your patience is appreciated.

If you would like to post a comment where others can read it, please go toDailyJava.net, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Thursday, September 23, 2010

The status quo, based on the premise of endless "growth" and debt-based "prosperity," is fatally burdened with perverse incentives.

Already dependent on an impossible model of endlessly rising consumption and debt, the U.S. economy is also burdened by perverse incentives which lead to structurally disastrous unintended consequences.

The U.S. culture, economy and Empire are based on the unquestioned presumption that debt-based "prosperity"--more consumption, more growth, more of everything-- is naturally endless. Thus adding "overhead"--unproductive costs--is subconsciously viewed as painless because "prosperity" will inevitably rise enough to effortlessly pay for the additional expenses.

The status quo is thus incapable of functioning in an environment of structurally declining income, consumption, taxes, debt and "prosperity."

This is how you get public pension plans which are wildly beyond the ability of the local government to pay as tax receipts enter a long period of decline.

In response, the status quo (Central State/Empire, its fiefdoms and financial/cartel corporate partners) imposes increasingly pervasive (and onerous) regulations to force compliance, with the single goal being the maintenance of the status quo Elites.

As noted yesterday, the U.S. has a highly progressive tax system: the bottom 60% pay almost no Federal income tax while the top 10% pays the vast majority of Federal taxes. This aligns with long-standing values of our society: the better-off pay more. Indeed, the U.S. has the highest nominal corporate tax rate of major economic powers, relatively high personal income tax rates, and until recently, estate taxes that were heavy enough to drive all the great fortunes into charitable trusts (Ford Foundation, et al.) lest they be lost to taxes.

As correspondent D.K. noted:

I don't see unearned (business) income as under-taxed. Corporate income is subject to 35% tax - making dividend and capital gain taxes double taxes. Add estate tax as the triple tax. Yes, the wealthy investor/business class is insulated - under-taxed, no.

Despite this steeply progressive tax structure, wealth and power continue to concentrate in the top 1% and top 1/10 of 1%. As noted earlier in the week:

Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase. How is this possible? One thing to consider is that in 2001, George W. Bush cut $1.3 trillion in taxes, and 32.6% of the cut went to the top 1%. Another factor is Bush's decision to increase the national debt from $5 trillion to $11 trillion. The combination of increased government spending and lower taxes helped the top 1% considerably.

As total household income declines, the wealthiest Americans take home a larger piece of the national income pie. In 2008, Americans reported $8.4 trillion in total income, down 4.6% from 2007. Adjusted for inflation, that is down 8.4%, the sharpest decline in total income since the brief recession that began in 1990.

David Stockman, director of the Office of Management and Budget under President Reagan, recently noted in an editorial that the top 1% of Americans received two-thirds of the gain in national income from 2002 to 2006.

Economists Emmanuel Saez and Thomas Piketty have reported that the top 10% of earners took home about half of all income as of 2007.

If taxes are highly progressive in the U.S., which they clearly are, then how can wealth continue concentrating into the top 1%? It seems that the efforts of the Central State to collect ever higher taxes have created perverse incentives, which have then triggered unintended consequences.

High tax rates encourage gaming the system/offshoring. While some think-tank studies claim that high corporate tax rates do not discourage relocation to lower-tax states within the U.S. (tell that to the film industry in Hollywood, which has been gutted as production moves to states offering huge tax breaks), only the willfully blind would claim high U.S. corporate rates aren't a factor in offshoring. Moving operations overseas and paying much lower rates on the income earned makes perfect sense.

Another perverse incentive is rarely noted: high tax rates encourage the financialization of the U.S. economy to the detriment of industry. A few years ago I recall reading that a major U.S. manufacturer (I think it was Whirlpool) paid the full 35% tax on their income, which resulted in a tax in the $100+ million range. In contrast, various financial firms (or firms like GE which have financial divisions) paid zero corporate tax, due to the multiple opportunities for gaming the system offered by finance.

If we consider an industrial corporation as an organism, then we have to ask why the organism would choose to pay 35% tax rate when other much more profitable options are available.

This helps explain why finance has come to dominate the U.S. economy, and why U.S. companies have embraced offshoring of production with such enthusiasm: they would be irresponsible not to.

The unintended consequence of high corporate taxes in a global economy is the gutting of U.S. industry and the ascendance of finance--and very possibly lower total taxes collected. Take away the perverse incentives for gaming-the-system and offshoring by lowering the corporate rate to a flat 10%, and perhaps total taxes paid by corporations would rise substantially.

The rising costs of political campaigns has opened the door to the concentration of power by the super-wealthy. The nation's inability to set any meaningful limits on campaign financing has led to the escalation of campaign costs to the point that serious status quo candidates must raise millions of dollars to win elections. This has made them beholden to "major donors" and their lobbyists.

This mechanism explains how a handful of Financial Power Elites managed what Simon Johnson identified as "The Quiet Coup" during the 2008 global financial crisis.

In other words, the exploding costs of maintaining political power has led to concentrated wealth holding concentrated political power. As a result (the unintended consequence), high taxes are burdening the top 19% but leaving the top 1/10 of 1% free to increase their share of the national income and wealth.

In another example of perverse incentives, correspondent Julie W. noted that volunteer "work" is forbidden to those collecting unemployment:

Thank you for another thoughtful essay on the state of our nation and, more specifically, our economy. While I agree that it would be beneficial for both the unemployed and non-profit organizations for people collecting unemployment to volunteer for these organizations, let me tell you what the reality is here in New York State (N.Y.S).

I was laid off from my job a little over one year ago. As you mentioned, I spend about 2 to 3 hours a day reading the paper and surfing the internet for paid work of which there is precious little. However, the worst part about being unemployed is that I actually had to GIVE UP VOLUNTEER WORK in order to be eligible! Unbelievably, the politicians in N.Y.S would rather pay me to sit at home and watch Maury Povich Show re-runs than allow me to assist with the organization of a community garden or volunteering to help the elderly or sick. Apparently, doing volunteer "work" while collecting unemployment insurance in NYS is considered a form of fraud. Here is the "Fraud Warning" from the Claimant's Handbook:

Claiming unemployment insurance fraudulently is a serious offense. It can lead to severe penalties, including CRIMINAL PROSECUTION and imprisonment. You may be guilty of fraud if you hold back information from or give false information to the Department of Labor. You must report the true reason you were separated from employment. You may be committing fraud if you work while receiving benefits and do not report that employment. This applies even if it is part-time work, operating or starting a business, providing services for yourself or others, no matter how brief, or whether you got paid. Protect yourself. If in doubt, report it. You must report all full-time and part-time employment to the Labor Department or you risk criminal penalties. (Their emphasis).

So, in NY State the politicians believe that it actually IS A GOOD IDEA TO PAY PEOPLE NOT TO WORK!

Rather than encourage productive labor, the status quo punishes it. This is symptomatic of the entire status quo, which is riddled with "fixes" and regulations which actively discourage thrift, productive labor, industry, and enterprise, while perversely encouraging gaming the system, offshoring, financialization and the further concentration of financial and political power.

Thank you, D.K. and Julie W. for your comments. The more laws the State imposes, the more lawbreakers it creates. The more it tries to squeeze from the citizenry, the more citizens slip through its grasp.

That's how you get economies in which 40% of the activity is "black market"/"unofficial" business (example: Italy), as only State enterprises and a few cartels can afford to function in the official economy.

I am slowly catching up on correspondence after several weeks away from my desk --your patience is appreciated.

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